Inflation essay
Inflation, popularly referred to as the general and quantitative rise in the price of goods relative to the available goods, often culminates in an overall decline in the currency’s purchasing power in an economy. From the module and the video referenced for the task, it is clear several potential effects are resulting from inflation when an engineering project or system is being evaluated. An engineering project will require finished products, which are a result of raw materials. When the rate of inflation keeps rising, the government may step in to regulate inflation by pumping dollars into the economy to avoid the possibility of an economic recession (Schwartz & Nova Science Publishers, 2009). This regulatory measure affects everybody and every other economic activity in the economy because pumping dollars into the economy increases its supply but devalues the currency making people spend more of commodities, goods, raw materials, etc. Consequently, for an engineering project, let say constructing a house by architectural engineers will be more expensive than it usually is when the inflation is not felt strongly. Secondly, some material for such projects like steel will need to be imported; hence, the currency devaluation will mean that the currency’s exchange rate will not compete favorably when purchasing materials from outside. Moreover, pricing will also continually rise in the end; the project’s cost will be enormous (Wensveen, 2011).
Moreover, it is crucial to note that the equation of exchange MV≡PQ suggests that the money supply in an economy multiplied by its velocity or the number of times it is spent to obtain goods and services, is equivalent to its GDP. This monetarist theory focuses on the money supply as the single most crucial determinant of the economic growth rate. Indeed, inflation is often a difficult problem in so many economies because of a variety of reasons. The first reason that is so pronounced in many countries is that every country wants to develop faster to improve its citizens’ living conditions (Schwartz & Nova Science Publishers, 2009). This quest for faster economic growth sometimes pushes counties to borrow from international partners to finance their respective agendas. They end borrowing a lot, so much so that they cannot service the debts and finance their basic operations as a people. In the end, they are greeted with great foreign debts, which reduce the competitiveness of their goods in international markets, thus subjecting them to currency devaluation-a critical component of inflation (Ōtaki, 2015). Secondly, it should be known that some governments do not track their inflation rates correctly; hence, they end up making wrong decisions because of incorrect statistics. When they finally find themselves between a hard place and a rock economically, they resort to desperate measures like increasing money supply, increasing inflation, hence becoming a perennial problem that gives birth to a vicious cycle(Ōtaki, 2015). Ultimately, most countries rely on imports of oil and oil products. It is fundamental to note that energy prices are a critical component of inflation, especially due to price instabilities in the international markets attributed to wars, conflicts, and such issues. These situations comprise those countries that are poor and dependent on oil imports because their currencies are already devalued (Wensveen, 2011). Therefore, a continuous picture of inflation in most countries becomes inevitable.
On a similar note, it is crucial to note that now and in the past several industries have found themselves battling inflation and its effects. For instance, an article by 24/7 Wall Street dated February 2011, features the Air Transport industry and how it has been affected by inflation in the past. The article features an increase in oil prices and how it made several airline companies to face a crisis of jet fuel. Companies in the industry characterized by the American airlines, united, continental, U.S airways, and delta all announced increments in the price of their tickets for the round-trip tickets for domestic destinations by a margin of $4 – $10, according to the new York stoke exchange. Thus, the increase in price tickets became the immediate reaction of the inflation-affected airline companies within the air transport industry in 2011(Kruse, 2014).
Ultimately, it is essential to note that there are huge disparities between the countries that receive large business and manufacturing investments and those that do not. Those countries that receive such a huge boost in the manufacturing sector tend to exhibit certain characteristics, which the other countries that do not receive such investments do not exhibit. Such characteristics revolve around low taxes, favorable business environments, favorable energy costs, and proper government policies. For instance, China, the United States, and Japan top the world in manufacturing output while Poland, Switzerland, and Netherlands close the three last spots (Hall, 2009). Other countries like those in Africa do not even make it to the rankings list. It is, therefore, crucial to note that the manufacturing sector is crucial, and in some countries like China, it contributes 27% to the national GDP and creates employment opportunities, which help in curbing the rise of inflation (Hall, 2009).